Liberalisation & Industrial Policy: 1991 and Beyond

1. Pre-1991 Industrial Policy — The License Raj Era

Industrial Policy Resolution of 1948 and 1956: Established the framework of a "mixed economy" with three sectors:

• Schedule A: Reserved for state only (17 industries — atomic energy, defence, railways).
• Schedule B: State initiative with some private allowed.
• Schedule C: Left to private sector.

Licensing System (IDRA 1951): Industries (Development and Regulation) Act 1951 required government licenses for establishing, expanding, or relocating any industrial undertaking above a threshold. This created the "License Raj" — a complex maze of bureaucratic approvals.

MRTP Act 1969 (Monopolies and Restrictive Trade Practices): Required large business houses (above asset threshold) to get additional clearances for expansion — aimed at preventing monopolies but in practice restricted efficient large-scale production.

Import Substitution Industrialization (ISI): High tariff walls and quantitative import restrictions to protect domestic industry. Created inefficiency and insulated Indian firms from global competition.

Public Sector Dominance: PSUs given monopoly in steel, coal, oil, banking, telecom, airlines, electricity. Many became inefficient, overstaffed, and loss-making.

2. The 1991 Crisis and Reform Imperative

By 1990-91, the Indian economy faced a severe balance of payments (BoP) crisis:

• Foreign exchange reserves fell to barely 2 weeks of import cover (USD 1 billion).
• Fiscal deficit had ballooned to ~8.5% of GDP.
• Inflation at ~17%.
• India was on the verge of sovereign default.

The government of P.V. Narasimha Rao (PM) and Dr. Manmohan Singh (Finance Minister) embarked on the New Economic Policy (NEP) 1991, consisting of:

• Liberalisation: Removing controls and restrictions on the economy.
• Privatisation: Reducing role of state and expanding private sector.
• Globalisation: Opening the economy to international trade and investment.

3. Core Reforms Under New Economic Policy (NEP) 1991

Industrial De-licensing: Abolished industrial licensing for most industries except 18 "reserved" industries (mainly hazardous and strategic). Later reduced to 5: Alcohol, tobacco, electronic aerospace, defense, industrial explosives. Public Sector Restructuring: Reduced reserved industries from 17 to 8 (now only railways, atomic energy). Opened banking, insurance, telecom, civil aviation to private competition. MRTP Reform: MRTP Act amended — pre-entry restrictions on large companies removed. Later replaced by Competition Act 2002, establishing the Competition Commission of India (CCI). Trade Liberalisation: Drastically reduced import tariffs (from average 87% to under 35% over the decade). Quantitative Restrictions (QRs) removed. India joined WTO (1995) committing to further trade liberalisation. Exchange Rate Reform: INR made partially convertible (Current Account, Capital Account remains regulated). RBI shifted from direct control of exchange rate to managedconvertibility. Financial Sector Reform: Private sector banks allowed (HDFC Bank, ICICI Bank). Foreign banks allowed. Capital markets liberalized — SEBI strengthened. FII entry in capital markets. Disinvestment: Government began selling stakes in PSUs. PESB set up for strategic disinvestment.

4. Effects of Liberalisation on the Indian Economy

Positive Effects:

• High Growth: GDP growth averaged ~6-7% in the 1990s, 8-9% in 2000s — far exceeding the pre-reform "Hindu Rate of Growth" (~3.5%).
• Export Growth: India's exports grew strongly — share in world exports increased (particularly software/IT services).
• FDI Inflows: Opened India to global capital — FDI grew from negligible to USD 80+ billion annually.
• Consumer Surplus: Prices fell for many goods (electronics, telecom services) due to competition; consumer choice expanded dramatically.
• IT and Services Boom: Liberalization of telecom and removal of controls enabled the IT sector explosion — creating high-value employment and exports.
• Poverty Reduction: Growth driven poverty reduction — poverty headcount fell significantly.

Negative/Contested Effects:

• Rising Inequality: Gini coefficient rose in the post-reform period — growth concentrated among upper and middle classes; rural-urban divide widened.
• Agrarian Crisis: Pre-reform public investment in agriculture (irrigation, R&D) declined; withdrawal of input subsidies raised costs. MSP politics failed to adequately protect farmers.
• Informalisation of Labour: Liberalisation incentivized companies to use informal/contractual workers to remain flexible and competitive.
• Deindustrialisation concerns: Manufactured imports (from China) undercut domestic medium and small industries in textiles, electronics, toys.
• Regional Disparities: Growth concentrated in already developed states (Maharashtra, Karnataka, AP, Tamil Nadu) — worsening interregional gaps.

5. Changes in Industrial Policy Post-1991

Foreign Direct Investment (FDI) Policy Evolution:

• Automatic route for FDI up to certain thresholds in most sectors.
• 100% FDI in manufacturing, chemicals, hotels, hospitals, software.
• FDI opened in multi-brand retail (51%), insurance (74%), defense (100%).

SEZs (Special Economic Zones):

• SEZ Act 2005 — create enclave economies with: full import duty exemption, income tax holidays, flexible labour laws, world-class infrastructure.
• India now has 400+ SEZs operational. However criticized for: land acquisition issues, tax revenue loss, failure to create large-scale manufacturing employment.

Make in India (2014):

• Campaign to make India a global manufacturing hub across 25 sectors.
• Ease of doing business reforms — single window clearances, online filings, reduced compliance burden.
• FDI policy liberalization.

Production Linked Incentive (PLI) Schemes (2020-present):

• Government offers financial incentives (4-20% of incremental sales) to manufacturers in 14 sectors: mobile phones, pharmaceuticals, medical devices, automobiles, textiles, food processing, specialty steel, solar PV, white goods, telecom.
• Aims to boost domestic manufacturing, enhance export competitiveness, create jobs.
• Apple (iPhone) production via Foxconn and Pegatron in India is a PLI success story.

National Manufacturing Policy (NMP) 2011:

• Target: Increase manufacturing from 16% to 25% of GDP by 2022.
• National Investment and Manufacturing Zones (NIMZs) — planned townships with industrial and residential areas and world-class infrastructure.

6. Competition Policy

Competition Act 2002: Replaced MRTP Act. Established the Competition Commission of India (CCI) — ensures markets remain competitive, prevents cartels, abuse of dominant position, anti-competitive mergers.

7. Assessment and Way Forward

The 1991 reforms were transformative — India's average growth rose from the "Hindu Rate of Growth" to one of the fastest in the world. However, the growth has been insufficiently inclusive. The challenge is to maintain a market-friendly environment for industry while ensuring:

• Labour-intensive manufacturing grows (through PLI in textiles, footwear)
• MSME sector is supported and formalized
• Agricultural sector is not left behind in reforms
• Competition is nurtured and monopolistic tendencies checked (growing concerns about market concentration in digital platforms)